22 May Chapter 11 for Individuals or Small Businesses

Chapter 11 for large corporations has been much in the news lately, but Chapter 11 can be a valuable tool for individuals and small businesses, too. For most individuals and small businesses, Chapter 7 and Chapter 13 are the first options considered, but Chapter 11 relief is not limited to large companies, or even to corporations. Chapter 11 is available to individuals and small companies, and though the administration of a case is Chapter 11 can be significantly more complicated than a Chapter 13, for example, the benefits can be significant, too.

For some individuals who want to reorganize or restructure their debt, but whose debt exceeds the debt limits for Chapter 13, Chapter 11 may be the only option. Although individuals whose debt exceeds the debt limits are rare in some places, in others (like California or Florida, which saw real estate values and mortgage debt balloon over the last few years) a significant percentage of the population may not qualify for Chapter 13.

What are those debt limits? Well, they are adjusted periodically, so it depends on when you are reading this. And debt limits are separate for secured and unsecured debt, and that calculation is complicated because the bankruptcy court doesn’t just consider your mortgage balance, for example, but looks at the value of your property, too. If you are interested in the mechanics, Michael Doan has addressed some of the complex issues of calculating debt limits, and he practices in California so he knows what he’s talking about. Suffice it to say you are going to need the advice of an experienced bankruptcy lawyer to know for sure.

If you are interested in reorganizing or restructuring a corporation, small or large, Chapter 11 is your vehicle. Corporations and partnerships don’t qualify for Chapter 13 at all. Many times a Chapter 13 for the owners of a small business may accomplish the same goals, especially if the business is the Mom-and-Pop, run-out-of-your-back-pocket kind. In fact, a large percentage of the Chapter 13s I do involve debtors who are self-employed. But if things are more complicated than that, or if there is some reason to keep the individual owners out of bankruptcy, Chapter 11 may be the best option. Again, the advice of counsel is essential to determine which is best.

There can be tactical advantages to filing a Chapter 11 even if you do qualify for Chapter 13. Generally, a Chapter 11 does not involve the appointment of a trustee. That doesn’t mean that you are going to be unsupervised as a debtor in Chapter 11, but it may mean that you retain a degree of control that you may not have in other kinds of bankruptcies. There are more rigid requirements for plans in Chapter 13 cases, which can be critical. For example, a Chapter 13 payment plan cannot exceed 60 months, but there is no such limit in Chapter 11. Chapter 13 payments are required monthly; for some businesses, a quarterly or bi-annual payment scheme is more practical. And that’s just for starters.

There are also significant disadvantages to Chapter 11, too. Most people who have been through a Chapter 11 would probably tell you that the expense is the biggest disadvantage. In my experience, the simplest Chapter 11 is likely to be at least five times the cost of a Chapter 13 and likely more. For small businesses and individuals, the administrative burden can also be significant. I know many of my Chapter 11 clients have felt that they had no time to run their business for all the bankruptcy-related tasks they had to take on. The time commitment to paperwork and court appearances is much greater in Chapter 11.

Finding the right attorney to guide you through these choices is important, too. Not all bankruptcy attorneys do Chapter 11 cases. Some choose not to do Chapter 11s because of the greater time commitment per case, and the level of staffing needed to handle such cases. Chapter 11 is generally not something you can dabble in–it takes a level of experience and expertise that generally eliminates the occasional practitioner. You may find an attorney who will do your Chapter 11, but refer you to someone else to do a Chapter 13, if that is your best option, and vice versa.

Courts, too, may differ in the way such cases are handled. Some jurisdictions have special rules that make small business and individual Chapter 11s easier by easing certain requirements or through special docketing rules. Again, it is vital to choose someone with experience in navigating these waters to help you choose the options will best serve your needs.